October 13, 2017 9:12 pm JST

Widodo energy reform flip-flop pressures Pertamina

Backtracking on subsidies set to hit profits at Indonesian state oil company

WATARU SUZUKI, Nikkei staff writer

Indonesian state-run oil and gas company Pertamina is planning a capacity increase for its oil refinery in Central Java, pictured in November 2015. (Antara News)

JAKARTA -- An apparent flip-flop by Indonesian President Joko Widodo on drastic reform of energy subsidies is taking a toll on Pertamina, the country's largest state oil and gas company.

Indonesia scrapped subsidies on regular gasoline in early 2015 to allocate a larger portion of the state budget to more productive areas, such as infrastructure. The move, which came less than three months after Widodo took office, was lauded by the business and international community, and soon became his symbolic policy as a reformist leader.

The end of subsidies meant that gasoline prices would move in line with benchmark oil prices.

However, amid concerns over the impact on consumer spending, the government, which reviews the price every three months, has not changed the price since April 2016, even though the price of Brent crude oil has risen more than 40% since then. Pertamina is now having to shoulder the difference between the market and government-set prices.

"The government looks at the soundness of the financials of Pertamina and we don't think it will jeopardize its existence," Energy and Mineral Resources Minister Ignasius Jonan said on Thursday. "Will Pertamina make much less profit this year? The answer is yes."

For the January-to-June period, Pertamina reported a 19% year-on-year increase in revenue to $20.5 billion, thanks to rising oil prices. But gross profit fell 20% to $3.5 billion due to higher raw material and production costs.

The price of gasoline will be kept at 6,550 rupiah ($0.5) per liter until December. Jonan declined to comment on the outlook for 2018. But economists say it will be increasingly difficult for the government to raise prices ahead of the presidential election in 2019, when Widodo is expected to run for a second term. While the central bank cut its policy interest rate for two straight months up to September, there are still no signs of a major pickup in purchasing power -- a phenomenon that Finance Minister Sri Mulyani Indrawati recently called "puzzling." 

But putting pressure on Pertamina's profits is a risky move for Indonesia's long-term economic growth. The company is tasked with investing in increasing production and building new refineries to meet rising domestic demand for fuel. Indonesia became a net importer of oil in 2003, and oil and gas imports swelled to $18.7 billion last year as demand continues to outstrip supply.

"The oil price has increased over the past couple of weeks. This is something that we need to figure out," Arief Budiman, Pertamina's chief financial officer, said at a seminar in late September. "There needs to be an optimal balance ... if you want to support the mandate of $50 billion [worth of investments] over the next five years."

In a sign that the government recognizes the constraints, the 2018 budget proposal set fuel subsidies at 51 trillion rupiah, an increase from the 44 trillion earmarked for 2017. This, however, marks a step backward for Widodo's signature economic policy.

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